MBS Live Day Ahead: Bonds Gearing Up For a Big Move

In the shorter-term, there's nothing too interesting about the past few weeks of trading.  Relative to the highs and lows set in the first 3 weeks of the year, the subsequent range has been well-contained.  Over the past 2 weeks, it's been getting narrower and narrower.

This is what we'd typically expect to see from a consolidation following a sustained move in either direction.  Like most any well-established security with deep liquidity and volume (i.e. not penny stocks or commodities), bonds need time to cool off before heating up again.  

Unfortunately, there are always 2 potential reasons for the cooling off.  They either need to catch their breath before continuing in the same direction or they are cooling off because traders are becoming less committed to pushing the move any farther.  We have 2 recent examples (relatively) showing both options.  In both cases, the subsequent moves were indeed big.  

The following chart uses long-term metrics in order to be somewhat relevant for potential big-picture shifts.  This is a great commentary on how moving averages and momentum studies work because it shows how something completely different can happen despite the same set-up.  In other words, technicals can't predict the future, but they can let us know to be on the lookout for certain possibilities. 

To recap the chart, the highlighted areas show the last 2 times that 10yr yields rose well above the 500 day moving average.  The subsequent rallies are the only 2 recent examples of a bounce back from the upper ceiling in the long-term stochastic study (same stochastics we often use, but using much longer time frame parameters).  The mid-2014 test of the 500-day average resulted in a break with significant follow-through (thanks ECB QE!).  The mid-2017 test resulted in a bounce to significantly higher yields (thanks a lot, tax bill!).

Bottom line, it looks like we're gearing up for another big move.  This is very much in line with our expectations for March to be a big month for the bond market for a variety of reasons (several uncertainties resolved for better or worse + big Fed announcement).  Again though, this is a very big-picture view.  We could be weeks away from an indication of a break or a bounce.  In the meantime, we continue to watch the 2.55-2.82 range.  Today is just another day smack dab in the middle.